Some investors look for rapidly growing Vietnam to emerge as the biggest winner of an escalating tariff fight between the U.S. and China.
As the potential trade battle threatens to slow the global economy, analysts say there are several Asian countries that could see a pick up in business from exporters and multinationals shifting their manufacturing operations away from China.
Among them, neighboring Vietnam is often the first on the list of companies who have soured on Chinese factories. In an interview with MarketWatch, Andy Ho and Michael Kokalari of investment and asset-management firm VinaCapital, pointed to some of Vietnam’s attractions including lower wages, a laissez-faire-oriented government, a long coastline, and its proximity to high-tech supply chains for cellphones and electronic products.
The biggest private-equity investor in the Southeast Asian economy, VinaCapital manages around $1.8 billion in assets. Through its closed-end Vietnam Opportunity Fund
listed in London, the firm deploys most of the firm’s money in private equity style strategies, buying up stakes in Vietnamese hospitals, schools and airlines.
Kokalari, the firm’s chief economist, said lower labor costs in Vietnam were the biggest driver of overseas manufacturers moving their supply chains away from China, a process that was well under way before the Trump administration started to hit out against the U.S.’s major trading partners for what it deemed as unfair trading practices.
Vietnamese manufacturing workers on average earned around $3,800 last year, around a third of China’s average of $10,500, according to the Hyundai Research Institute.
Trade tensions accelerated the migration of factories but was not responsible for kick-starting it, said Ho, the firm’s chief investment officer.
Vietnam attracted $19 billion of foreign direct investment in 2018, an around 9% increase from last year. FDI refers to outside investment to build plants and to acquire businesses, as opposed to buying the stocks and bonds of foreign companies.
Economists at Standard Chartered estimate Vietnam could receive an additional 2.8% growth boost if the Trump administration acts on its threat to slap a 25% tariff on all Chinese imports, a move that would reduce China’s GDP growth by 1.2%.
However, in an extreme scenario in which the U.S. stops all exports from China, the economic dent to Vietnam would come to around 0.9% of its GDP.
The southeast Asian economy has expanded on average at a pace of around 6% every year since 2000.
Vietnam’s Ho Chi Minh stock index is up 9.3% in 2019, beating out the 5.7% gain in the benchmark MSCI emerging markets index
Still, that pales to the run-up in China’s CSI 300 index
which has climbed 24% year-to-date. The S&P 500
is up 14.7% year to date.
Besides U.S. multinationals, Chinese companies were also moving parts of their manufacturing operations to Vietnam to circumvent import levies imposed on China.
Kokalari saw several Chinese-owned tire factories located in Vietnam that would add finishing touches to products that had been mostly completed in China. Federal rules of origin allow importers to say goods have come from a given country if they are “substantially transformed” there, though trade experts say such rules lack clarity and are often decided on a case-by-case basis.
“They just do a bit of polishing in Vietnam to already finished products. That is a bit concerning,” said Kokalari, who was worried the practice could draw the ire of the Trump administration, especially when Vietnam sports one of the biggest trade surpluses among the U.S.’s economic partners.
Based on the level of new investment to open up factories, China had beaten out the more traditional players like South Korea and Japan.
On a year-over-year basis, China pledged $1.4 billion of foreign direct investment into Vietnam in the first four months of 2019, from $400 million over a comparable period last year.
At the same time, the rush of investment was testing the limits of Vietnam’s infrastructure.
Rapid economic growth has led to higher industrial land prices, road congestion and electricity constraints, leaving the government to play catch up as it scrambles to build roads, ports and power plants to service the country’s fast-growing coastal industries.
Highways and roads on the outskirts of Ho Chi Minh and Hanoi would rumble with the sound of trucks and container vans stuck in traffic in the early morning hours, said Kokalari.
Bagmakers Tapestry Inc., owner of Coach and Kate Spate brands, and Vera Bradley reported in an earnings call earlier this month that delivery times had slowed down as port infrastructure in southeast Asia failed to keep up with demand.
A renewed trade spat could blemish Vietnam’s growth story for another reason, too.
Flaring trade tensions have triggered episodes of weakness in the yuan, threatening to erode the Vietnam’s relative strength as low-cost exporter versus China. As a result, Vietnamese equities are particularly sensitive to movements in the Chinese currency.
In 2015, a 5% depreciation of the onshore yuan
against the greenback triggered a 15% selloff in Vietnam’s benchmark stock index.
Still, Kokalari said Vietnam’s cheap labor helped offset the yuan’s fluctuations.
“When your wages are 1/3 less than China, a few percentage point changes in the yuan doesn’t mean much,” he said.
Want news about Asia delivered to your inbox? Subscribe to MarketWatch’s free Asia Daily newsletter. Sign up here.